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Thursday, March 13, 2014

A Chemist’s Critique of Economics and “Sustainable Development”

Part I: Contemplation
of the Energy Return on Investment (EROI)

Author’s noteThis
post is a bit longer (and headier) than previous posts, but herein I open a
very complex and somewhat controversial constellation of subjects, and attempt to
treat matters in a cross-disciplinary manner and at the root-level.

My intention in blogging for Chemists
Without Borders is, in addition to producing journalistic descriptions of field
projects and laboratory research geared to the development of appropriate water
and sanitation technologies, from time-to-time to develop in-depth discussion
of pertinent “big-picture” themes in economics and sustainability. I invite you
to participate in the discussion through the “Comments” section – your feedback
will likely shape future posts on these complex topics.

That a Chemist would inveigh against
contemporary prevailing economic orthodoxies is perhaps a rarity but not
without precedent.Frederick Soddy won
the 1921 Nobel Prize in Chemistry for his work (with Ernest Rutherford) on
radioactive decay, but spent much of the rest of his career developing critique
and prescriptions for economics rooted in physics. He called for radical shifts
in our concepts and policies pertaining to money and finance, including, for
example, the abolition of fractional reserve banking. For this, according to
one reviewer of Soddy’s legacy writing recently in the NY Times op-ed section, he was “roundly
dismissed as a crank.”

I’m well aware of the danger of also
being labeled a crank, at least in the short term. But as the saying goes,
“Nature bats last.” Moreover, the ideas of Mr. Soddy and his intellectual heirs
in the emergent paradigm of Ecological Economics go along way to explain the abysmal
failure of most establishment efforts in “sustainable development” over recent
decades. These matters are deeply relevant to scientists such as “Chemists
Without Borders” aspiring to impact the humanitarian development sector in a durable
and beneficial manner.

* * *

The word sustainability
is flung around an awful lot these days, not least in the eponymous sector of sustainable community development. Unfortunately
this most often happens with an astonishing lack of comprehension of basic foundational
concepts. As “Chemists Without Borders,” we might hope to offer some
prescriptive illumination on the subject.

A major hindrance to authentic sustainable development arises
from the gaping disconnect between economics and the natural sciences. As an
undergraduate Chemistry major, I was introduced to the First and Second Laws of
Thermodynamics – in lay terms, (1) matter and energy are conserved, neither
created nor destroyed but rather altered in form, and (2), there’s no such
thing as a free lunch. Accordingly, it never fails to send me into a state of sputtering
apoplexy when I hear economists, business people, political leaders, and
development wonks stumping for this-or-that program designed to “promote and ensure
sustainable growth.”

It ought to be obvious to everyone that pursing infinite
growth on a finite planet is a futile (and destructive) absurdity. But most professionals,
even those working explicitly in the “sustainable development” sector don’t
seem to get it. (Trust me – I have been to their conferences, and no, they
don’t get it.)

The problem extends right up to the highest levels of
thought-leadership. To wit, financier Michael Metcalfe’s recent vacuous and smarmy TED talk suggesting the solution to global
poverty is just to print more money. Jeez – why didn’t we think of that decades
ago and avoid the whole problem of poverty in the first place?

Concerns about the rampant inflation such an approach would
trigger notwithstanding (Metcalfe lamely dodges this point in his talk), it’s
obvious that the self-proclaimed “financial whiz, economist and macro
strategist” has no grasp on the fact that debt-based money represents a future
claim on real wealth, that the ultimate source of all real wealth is Nature (i.e.
the biosphere), and that under a highly leveraged fractional reserve system the
aggregate of such claims may far exceed the capacity of physical resources to
pay them back.

I harshly pick on Metcalfe as a rhetorical foil to make the
point that we Chemists (With or Without Borders), along with our other natural
science colleagues, have a mission to “connect-the-dots” that will bring
economic and development agendas back into conformation with bio-physical
reality.

EROI: Energy Return on
Investment

To do this, our conceptual toolkit should include an in-depth
look at EROI: “Energy Return on Investment.” EROI is net energy – the amount of energy left over once the energy costs
of extraction are subtracted. Professor David Murphy of Northern Illinois
University has recently published an excellent review of EROI with sobering implications for the
future of economic growth.

We in the developed world have gotten used to continual economic
growth as "normal" over several generations' time since the advent of
fossil fuels, oil being of prime significance. In the past, we have always
being able to expand our access to cheap, accessible high-EROI oil, and this
has enabled economic growth and vast increase in societal and infrastructure
complexity. In the initial heyday of US oil drilling in the early 20th
Century, for example, the EROI was 100:1 or more (Hall and Day, 2009; Heinberg,
2011). This means that for every barrel of oil expended in exploration,
drilling and extraction, we got 99+ barrels in return – an energy windfall
unprecedented in the evolutionary history of the planet.

Given that the exponential increase in global economic output
over the past 200 years is highly correlated with the same exponential increase
in energy consumption (Murphy, 2014; see also below), the exhaustion of cheap
high-EROI oil can be expected to cause economic growth to stall and reverse into
contraction. This, in turn, can be expected to precipitate rapid civilizational
decomplexification along with severe social and economic dislocation, since the
energy surpluses used to build and maintain societal infrastructure at a
previously high EROI erode rapidly and in a nonlinear manner.

Over the past decade, we've run out of cheap, easily
accessible, high quality oil, and have begun to exploit more dispersed,
environmentally risky, geo-politically contentious, low quality, and therefore
more expensive, low-EROI resources such as fracked shale oil, tar sands, and
super deepwater offshore deposits. Murphy summarizes that“the average EROI for US oil production has
declined from roughly 20 in the early 1970s to 11 today, while the global
average EROI was roughly 30 in 2000 and has declined to roughly 17 today.” He
indicates that the EROIs of oil production from ultra-deep-water areas,
biofuels, and tar sands/oil shale are “less than 10,” “between 1 and 3,” and
“roughly 1.5,” respectively.

For professionals in all fields concerned with true
sustainable development, then, the ineluctable but deeply troubling questions
is,

What is the minimum EROI required to run a highly globalized and
integrated, sub-/urbanized, industrialized, hyper-complex society, and where
are we now with respect to that minimum?

Furthermore, this question must be asked with the cognizance
that, as Murphy points out, (1) the exponential relation between gross and net
energy flows (the so-called ‘net energy cliff’, see below) comprises a critical
point in the relation between EROI and price at an EROI of about 10; (2) the
relationship between EROI and profitability becomes highly nonlinear as the
EROI declines below 10; and (3) the minimum oil price needed to increase global
oil supply in the near term is comparable to that which has triggered economic
recessions in the past.

High oil prices reliably send the economy into a recession,
because energy is the “master resource” that effects the production, and
prices, of all other goods and services in the economy. Economic recession
destroys demand, lowering oil prices; but if oil prices drop, then it is no
longer economical for energy companies to exploit expensive low EROI resources.
These upper and lower oil price bounds have characterized the bumpy plateau of
oil production that we have been on since 2005, and go along way explaining our
protracted economic non-recovery from the financial crash of 2008. Some
analysts think that this indicates we’ve hit peak oil, and also that it signals
the end of the era of economic growth (e.g. Heinberg, 2011) – that we are not
in a "recession" per se,because "recession" implies a defined trough ending with
an uptrend back to "normal," but are experiencing the first symptoms
of economic stall and contraction.

The problem within the so-called “sustainable development”
sector is that we talk incessantly about sustainability when we should be
talking about un-sustainability. Economic growth is unsustainable, by
definition, since it implies increasing demands for energy, resources, and
waste assimilation capacity. Moreover, at this point in time the proliferation
of “illth” (economic “bads”) has outstripped the production of wealth (economic
“goods”), and so further growth should rightly be termed uneconomic (Daly, 2005). Substitution, technological innovation,
and gains in efficiency can help, but not
beyond the limits specified by the laws of thermodynamics. (Many scientists
and engineers who should know better frequently forget this point.) Moreover,
efficiency gains often backfire as increased consumption outstrips them (the
so-called Jevons Paradox, or rebound effect). Technological innovation routinely
creates more problems than it solves through unintended consequences and
diminishing returns (e.g., see Heusemann and Heusemann, 2011). And as
ecological economists have demonstrated, human capital is complimentary to
natural capital, not a substitute for it as assumed by mainstream economists
(Daly and Farley, 2004). This limits the extent to which resource substitution
is effective or possible.

These are all concepts that Chemists and other natural
scientists should have no problem grasping, because they are rooted the same
laws (conservation of matter and energy, thermodynamics and entropy, etc.) that
form the basis of our research and teaching. Our task is therefore to help
society use these science-based methods for setting targets for authentically sustainable development.

Delving into more specifics and variations for how we can
accomplish this task will be taken up in future blogs.

1 comment:

Nicely done, Josh. I look forward to your future blogs on this subject. Mobilizing chemists and others to speak out on these issues is essential. How do we accomplish that on the scale required to make a difference? Is it time for your own TED talks? Peace, Bego

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